RBI’s Rate Cut to Push Realty Demand Upwards

The much awaited decision was finally taken by end of September of 2015. The central bank, Reserve Bank of India (RBI) had cut the rates, surprisingly, by 50 basis points. This will boost the real estate industry of the country. Now getting finance has become bit affordable. This decision will generate demand for housing as well as for housing loan. The RBI’s decision was much more than expected. As an impact, all the banks including public sector and private are forced to reduce their lending rates and interestingly they did it.
After the reduction in lending rates, the demand for liquidity will increase. This will give a boost to the sentiments end users as well investors of real estate in the country. Even the 0.50% reduction in lending rates matters a lot. Either the number of EMIs comes down or the amount paid every month shrinks marginally.
In the policy presented by RBI, the repo rate was cut down by 50 basis points to 6.75%. Further, the banks have reduced their lending rates in range between 0.25% and 0.50%. At present, the lending base rates of banks are around 9%. The bankers across country have been witnessing fall in demand for housing loan but with finance becoming economical, the demand for housing loan is expected to go up.
With this cut the repo rate has come to 4-year low from 7.25% to 6.75%. RBI projects GDP to grow in the second half of the fiscal year. The central bank is projecting 7.4% GDP growth precisely after getting push from second half of the year.
The reduction in rate will not only boost the demand in real estate but in overall manufacturing as well as service sector. The new projects will begin, the halted projects will move ahead towards commissioning and the recently commissioned projects too will get boost.
Meanwhile, the festive season is around. The buying capacity of the consumer too will rise exponentially. Thanks to under controlled inflation rate, the spending will be higher and even savings will grow.
RBI says inflation is expected to reach 5.8% in January 2016. With higher GDP growth and controlled inflation rate, recruitment will be in full swing. New jobs will take place and growth in salaries will increase the demand for housing in coming years.
The days are not far when there will be mad rush for booking the new houses even in sub-urban areas of cities across country. The demand is likely to exceed supply of number of units being developed in couple of years.
However, there will be a few challenges or hurdles standing in between the growth of real estate. The less-than-normal monsoon rainfall may be the dampener. There is risk of food inflation rising. Meanwhile, tepid global demand, soft commodity prices coupled with postponement of policy normalisation by the US Fed have created additional fear. The uncertainties will always be there.
But if believed to the experts, RBI’s decision to cut interest rates by 50 basis points amidst stable inflation indicators, augers well for steady economic growth and is expected to bolster investment demand. This should act as a catalyst to revive sentiments in the real estate sector.
At a time when Indian cities are witnessing subdued housing sales, this correction in prime lending rates would help stimulate home buyers’ interest and spur home-buying decisions. Although demand from end-users may take a bit longer to transform to active buying, buyer inquiries may increase in the short-term in expectation of lenders passing on the benefits of reduced interest rates.
However, the extent to which lenders pass on the benefits to customers would determine the actual magnitude of increased housing sales. On the developers’ part, the cost of borrowing could also decrease marginally, who have been reeling under high funding cost and increasing costs of construction.